What do you need to know to trade the Dow?
The Dow was up last week despite the uncertainty surrounding the Greece bailout deal. So what does this mean for traders, and how can you go about trading the Dow?
The Dow… America’s cash cow?
Despite the troubles in Europe – and I will not be going into detail on Greece as I am sure you are as sick of it as I am – the indices in general in Europe have been performing relatively well. The inability to sell off in Europe and the ‘dip buying’ has been mirrored in the US and none more so than in the Dow.
The Dow Industrial has hit 18,000 like a freight train. Repairing the losses we saw in the run-up to the Greek situation in late June, the sheer scale of buying has been staggering.
To trade the Dow, or indeed any product, you have to look at what you know has happened in the past to build a case for what could happen in the future.
Here is the monthly Dow chart:
- What is the trend?
- How has the market reacted to the ‘trend line’
- The market may be high, but looking back what is likely to happen going forward?
These are some basic questions you should be asking yourself with any product you are looking to trade. What do I know? How can I use it?
In this case the Dow has rejected any ‘red candle’ low on or around the trend line and in the next monthly candle continued to move higher. We are trading well above 17,100, which is the 50% Fibonacci retracement level we have identified from the start of the last bull move.
We looked at the use of Fibonacci levels to predict future price movement from past movement in a previous blog post. In this scenario, the Fibs are telling me new highs are more likely in monthly terms than new lows.
Here is the daily Dow chart:
The daily chart supports our monthly view. Every time we see a sell-off the market is bought back up. In this case we see a ‘gap’ down below a Fibonacci level. The market closes towards the low of the day but if you look at a weekly or monthly chart you’ll see the Dow finds it impossible to hold on to the lows and moves higher.
This daily selling momentum quickly disappears, as the gap is closed and the Dow soon continues though to 18,000 and consolidates towards the top of the range.
So what is the most likely outcome now? Having seen the monthly chart’s ‘bigger bullish’ view do we think this is a good time to sell? Having seen the fundamentals and the Greek situation bringing fear into play, do we think there is more or less fear currently in the markets?
The main issue with people’s opinions is that they rarely back them up. The Dow is trading very high – so it must come down. Correct, but when?
Trading is not about being right it is about being right at the right time. Opinions count for very little. The Dow is on a massive bull run. Until interest rates go up there are no better returns than from equities, in my view.
Chief Market Strategist
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The content of this article is the personal opinion of the author and not Intertrader.com. The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.